Palm oil creates winners and losers in the bakery industry

April 1, 2014
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by Lauren Bandy, Euromonitor International

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With half of all food products containing palm oil, food companies are some of the biggest users of the ingredient, but there is increasing pressure on them to move to sustainably sourced variants. Ironically, the popularity of palm oil was driven, in part, by consumer pressure on the food industry to switch to trans-fat-free alternatives from partially hydrogenated vegetable oil. However, consumer priorities are constantly changing, and ethical consumption is the flavor of the year in many markets. The actual amount of palm oil contained in packaged food products varies from 1% in bread, 2% in ready meals, 4% in chocolate confectionery and 14% in biscuits. Given the relatively small amount required for most packaged food products, none of the global Top 10 packaged food companies will be particularly heavy users, yet the negative consumer reaction against palm oil can be damaging for a company’s brand image, as US-based Kellogg Company has learned all too well recently. Conversely, companies that have managed to set and reach sustainability targets are hailed as responsible members of the food industry by consumer groups, a highly sought-after label.

Learning a lesson

In 2013, consumer groups turned on Kellogg after media reports claimed that its supply partner, Wilmar International, Singapore, had provided it with illegally grown palm oil from Indonesia. In Kellogg’s case, the damage was mitigated through CSR policy, with Kellogg announcing its intention to source sustainable and traceable palm oil. Whilst a product boycott was a long way off, it was not inconceivable, especially given previous examples such as the backlash against Nestle, Vevey, Switzerland, over its marketing of milk formula in Africa. If just 1% of Kellogg’s consumers were to stop buying its products, company sales could fall by US$200 million, making sustainable palm oil a comparatively cheaper option for the company. While traceable and sustainable palm oil comes at a higher price, given that it makes up a small proportion of manufacturers’ ingredient costs, the impact on profit margins would be minimal, and the cost is dwarfed when compared to the longer-lasting effects of negative brand image.

The catch: limited supply

The current standard for food companies looking to source sustainable palm oil is through the Roundtable of Sustainable Palm Oil (RSPO). Of the estimated 50 million tonnes of palm oil, only 15% is certified by the RSPO, and while these standards go some way to mitigating the environmental impacts of palm oil, deforestation and land disputes with indigenous populations continue. Partly out of social obligation and partly as positive PR, there has been a new wave of manufacturers and oil suppliers claiming they will only use deforestation-free, peat-free and traceable palm oil. The wave of companies moving to sustainable palm oil means demand may outstrip supply and those companies that are slow to make the move might risk getting left behind.

Switch now or pay later

Palm oil is becoming an increasingly hot topic in the food industry, and there’s a growing awareness among consumers of food’s impact on the environment, from the larger issues of waste and greenhouse gas emissions to the use of palm oil and its environmental footprint. While there has been a concerted effort by the food industry to ensure the supply of palm oil is transparent and sustainable, companies could find that they have to pay a price one way or another — either by alienating green consumers or having to pay a premium for an alternative sustainable ingredient — if they don’t switch to certified palm oil soon.

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